Broker Check

Inflation may continue to slow - January Market Update

January 12, 2024

At A Glance

  • 2023 predictions about the economy and investment returns ended up being very different from actual results as we ended the year.

  • As we begin 2024, all eyes continue to be squarely on the Federal Reserve Bank, as Chairman Jerome Powell indicated that the central bank would likely reverse course and begin cutting interest rates this year.

  • Supporting this view are expectations that both economic growth and inflation will continue to slow due to the lagged effect of higher interest rates.

  • As we move into the Presidential and Congressional election season, we caution against reacting to political headlines. Over time, markets are primarily driven by interest rates, economic growth and corporate earnings more than politics.

  • With stock and bond markets moving significantly higher over the last two months of the year, now is a good time to refill cash buckets for those of you taking RMD’s or needing to take withdrawals over the next 6 to 12 months.

 

The Investment Committee met on the afternoon of Tuesday, January 9th. As we turned the calendar into 2024, we were happy to have the opportunity to review and share information from the economists and market strategists that our team follows.

As usual, the beginning of the year brings about many outlooks predicting what the markets, the economy, and the Fed will do in the upcoming year. Looking back, we would like to remind you that the consensus outlooks each of the last two years was clearly off base. We encourage you to to put too much weight into these predictions, as there will likely be future events, not yet known, that could Influence both markets and investment returns.

The committee continues to believe that in times of heightened uncertainty, the best strategy is to maintain a diversified portfolio. The biggest risk of a diversified portfolio is that you won’t make a killing, because you won’t have all of your eggs in the basket(s) that are going up. In exchange, you won’t get killed by having all your eggs in the basket(s) that are going down. Staying diversified and rebalancing your portfolio to take advantage of normal market volatility is a long-term strategy that can lead to successful investment returns.

Global stock and bond markets moved up sharply in the last two months of the year. Much of this was driven by economic news in November that led the consensus to believe that the Fed was done raising interest rates. This was reinforced when the Fed met in December, and said that they were unlikely to raise rates further. Fed chairman Jay Powell also indicated that the Fed could cut interest rates as many as three times in the coming year.

This led the stock market higher and interest rates lower. As you can see in our chart below the market is now pricing in six rate cuts by the Fed, as there is growing belief that both economic growth and inflation will continue to fall towards the Fed’s long-term targets. One side or the other will eventually be proven wrong, and this could create bouts of volatility in the markets this year.

 

To that end, the unemployment report, which came out on Friday, January 5th, showed that more than 200,000 jobs had been created. This was above expectations. The unemployment rate remained at 3.7%, a historically low number. However, the report also included negative revisions to the previous two months, a lower number of hours worked, and private payroll growth continuing to slow.

We would also like to remind you, our trusted friends and clients, not to get too wrapped up in the day-to-day political headlines. With both Presidential and Congressional elections coming up in this calendar year, the cable news and social media outlets are continuing to stir emotions. It is not uncommon for investors to get caught up in the news and noise. However, as you can see from our second chart below, the stock market has produced relatively steady and consistent results, regardless of which party is in charge.


We can also see that the average stock in the S&P 500 index is trading at a much lower valuation than the index as a whole. As we entered 2024, the forward P/E ratio on the S&P 500 index was 19.2X, suggesting that the index was fully valued. However, that valuation has been driven by just a handful of the mega-cap tech and AI companies. When looking at the equal weight index, in which all 500 stocks are treated the same, the valuation drops to a much more reasonable 15.9X. 

Over the last month, economic news has continued to surprise to the upside. As you can see, the Citi Economic Surprise index, which measures actual results versus expectations, has moved significantly higher in the last 30 days. This comes as measurements of economic activity, employment, and inflation have all improved. While good news about the economy is generally to be cheered, it is important to remember that this may cause the Federal Reserve to take a more cautious and measured approach in cutting interest rates, which could disappoint the markets.


Final Takeaway

Finally, as markets have moved back towards all-time highs, we believe that there is wisdom in raising cash for any RMD‘s, systematic withdrawals, or other cash needs that you may have in the next 6 to 12 months. We remind you that you make money over time by buying low and selling high. Today we have an opportunity to sell near highs, and reduce the potential impact of future volatility on your cash needs. If you have questions about your particular situation, please reach out to your advisor.

The investment committee appreciates your continued trust and support. We will continue to diligently watch and research our economic landscape. We will be ready to act if or when needed to manage your hard earned assets. It is a responsibility that we take extremely seriously. We are here for you. If you have questions, please do not hesitate to reach out.

Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

 

Investment Committee Members


Kevin Myers, Financial Advisor - ATL Global Advisors

Jesse Hurst, Financial Advisor - Chair, Impel Wealth Management

Clint Gautreau, Financial Advisor - Horizon Financial Group

Nathan Ollish, Financial Advisor - Impel Wealth Management

Joy Schlie, Financial Advisor - FHT Financial Advisors

Dusty Green, Financial Advisor - Spencer Financial Inc.


The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.

Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. A diversified portfolio does not assure a profit or protect against loss in a declining market.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker/dealer, and a Registered Investment Advisor. Cetera is under separate ownership from any other entity.